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Financial Market Response following the Japanese Leadership Election

Foreign exchange experts from leading banks have exited their positions for holding a bullish stance on the yen after Japan’s leading political group elected Sanae Takaichi to be its head.

In a note called “Leaving yen positions,” a chief for currency analysis stated:

We held a long yen position within our portfolio but have closed this following the weekend’s election result. Sanae Takaichi’s surprise victory brings back significant doubt regarding Japanese economic goals and the expected date of the BoJ [Bank of Japan] hiking cycle.

Analysts concur that inflation is a problem in Japan, but questions are mounting regarding how it will be addressed.

The expert also warned evidence of political control across Japan (in which politicians direct the central bank’s actions) pose a potential danger.

Gold Approaches the $4,000 Level

Gold prices are hitting unprecedented levels, once more, in its strongest year in over four decades.

The spot price of the precious metal has surged by over 1% this morning to $3,944 per ounce, as it closes in on the $4,000 per ounce level.

This shows gold’s value has jumped fifty percent since the start of January, likely to achieve its strongest yearly performance in over 45 years.

The metal has risen in recent months due to multiple reasons, such as rising concerns that public borrowing are unsustainable.

Takaichi’s victory in the Japanese election will only have reinforced worries that politicians will attempt to secure growth by borrowing more and reduced rates, and rely on inflation to reduce the real value of accumulated debt.

Financial Summary

Japan’s stock market has rallied to an all-time peak in Monday trading, with the currency dropping, following the chief role of the country’s ruling party was surprisingly won by stimulus supporter Takaichi.

Forecasts that Sanae Takaichi is likely to be a PM favoring economic stimulus has ignited a rush of positive investment that has pushed the Tokyo stock index higher by five percent, rising by 2315 points to close at 48,085.

Yet the Japanese yen is heading the opposite way – it’s down nearly two percent relative to the USD to 150.3 yen per dollar.

Takaichi, set to be the first woman to lead Japan soon, is a long-time admirer of the former UK leader. However, while she holds conservative views in social matters, the new leader follows a contrasting path to fiscal policy, and supports higher state investment and accommodative central bank measures.

Therefore, analysts anticipate to continue the country’s drive to boost economic growth via government outlays and reduced borrowing costs, likely resulting in increased price pressures and greater borrowing.

As a result yen depreciation, as investors anticipate fewer interest rates hikes by Japanese authorities relative to previous forecasts.

Japanese long-term bond prices are also down today, lifting the interest rate on long-term Japanese bonds near to peak levels, because of predictions of higher borrowing and more persistent inflation.

The markets are assessing the degree to which the new leader’s plans will mirror the policies of Shinzo Abe advocated by ex-prime minister Shinzo Abe.

A market expert noted:

Unlike in late 2024, Takaichi has refrained from highlighting the three-arrow strategy during the party election, but many are aware her core beliefs and her appreciation of the former PM’s three-arrow philosophy.

Investors might thus seek to gain understanding regarding her stance, and how much impact she could be in shaping monetary policy, ahead of the BoJ’s next meeting is viewed as a key event with a quarter-point increase seen as a real possibility...

Market Agenda

• 08:30 British Summer Time: European construction data for last month
• 9:30 AM UK time: British construction figures for September
• 18:30 BST: Central bank head Bailey to give keynote speech at an investment conference 2025